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Does McDonald's Have a Plan for Growth?

McDonald's is in a tough spot. Is the new CEO addressing the company's real problems?

Visiting McDonald's less than you used to? Same-store-sales figures say you are.

Wall Street generally takes a wait-and-see approach whenever a new CEO takes the helm -- even if the company's stock was overvalued to begin with and the new CEO appears to lack a comprehensive plan to solve its true problems.

For a good example of this phenomenon, look no further than McDonald's(NYSE:MCD). New chief Steve Easterbook has his company outperforming the S&P 500 by a modest margin thus far, while providing no substantive reforms to turn things around.

In early May, after a month of kicking the tires and strategizing on a turnaround plan, Easterbrook gave a widely anticipated video presentation with his prescribed fixes. Unfortunately for investors, the 23-minute presentation was long on specifics in areas that probably won't change the company's long-term growth trajectory -- most notably, his plans to cut $300 million annually in costs, refranchise more company-owned stores, and aggressively return capital to shareholders -- while it was short in the areas that could drive a return to growth.

So while it's possible that Easterbrook's changes will provide a short-term earnings boost, it doesn't change the long-term issues the company faces: perceived low-quality food that consumers are increasingly rejecting, and bloated menus that slow food delivery and escalate tension with franchisees. Actually, Easterbrook's plan will increase the franchised store base and possibly exacerbate problems. In the critical area of food quality, Easterbrook's presentation fell flat, and investors sold off the stock 1.7%. S&P downgraded its debt that same day.

Not reporting numbers doesn't change numbersFollowing the turnaround-plan fiasco, the company addressed its struggling same-store-sales figures -- which had fallen for 11 consecutive months -- by announcing it will stop reporting the figure, as it "lends itself to more volatility."

While most of McDonald's competitors have also stopped announcing monthly sales figures, this reporting change won't impact McDonald's actual performance. In all probability, this decision will lead to more volatility around quarterly reports, when sales figures must be reported.

And while cost-cutting can make up for sluggish revenue growth in the short term, to reward investors on a long-term basis a company must grow its top line. In the end, McDonald's can't cut its way to prosperity and shareholder gains. That's important, as this mature company is now valued at a PEG ratio of nearly 3, with an expected 7% annualized EPS growth over the next five years -- a figure certainly not priced for earnings decreases.

It's all about the foodAt this point, what ails McDonald's has become so widely discussed that it's almost a cliche. Consumers are looking to move away from perceived low-quality fast food and evolving toward fresh ingredients.

For the best example of this migration, look no further than former McDonald's subsidiaryChipotle and the tremendous growth it's registered. McDonald's has tried to improve its menu quality recently with a sirloin burger, but that's only a limited-time item. It won't singlehandedly improve McDonald's food-quality reputation.

For a burgers-to-burgers comparison, Shake Shack has grown rapidly, registering a year-over-year same-store-sales increase of 11.7% for the last reported quarter, while McDonald's reported a U.S. comparable sales decrease of 2.6%. And while it's important to note that these numbers are on entirely different scales -- McDonald's reported more revenue in one day last quarter than Shake Shack reported for the entire quarter -- Shake Shack is growing, as more people become attracted to its high-quality burgers.

It will be hard for McDonald's to fully reinvent itself, as its value proposition has been cemented as a low-cost value-meal provider. But this reinvention may be required for long-term success. In the end, refranchising restaurants is thinking small, and shareholders should expect more from the company.

Author

Inspired by the idea of "making your money work for you" at a young age, mostly because he was a lazy child, Jamal parlayed that inspiration into a love of the psychology of markets, competitive advantages, and thematic investing. He later shrug off that laziness, with a career that included stints as a mortgage trainer, a financial advisor, a Sr. Investments Communications Specialist, and a stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance, American University with a masters in finance, and is a CFA charterholder.